How does the effective tax rate for an individual differ from that of a corporation?

There is not much difference between the method of calculating or meaning behind the effective tax rate for individuals on the one hand and corporations on the other. Corporations and individuals in the United States are subject to progressive marginal tax levels, and their effective tax rates are affected by how much taxable income falls in each tax bracket. The effective tax rate for individuals equals adjusted gross income divided by total tax expense. Similarly, the effective tax rate for corporations equals earnings before tax divided by total tax expense.

Effective Tax Rate for Individuals

Suppose Tom earns $100,000 in annual income. He is not likely to be taxed at $100,000. His income is reduced in the eyes of the Internal Revenue Service through deductions, adjustments and exemptions. Suppose the sum total of those factors effectively reduces his taxable income by $30,000.

In 2015, the marginal tax rate for income earned between $37,450 and $90,750 is 25%. This means that Tom's marginal tax rate is 25%. However, his first $9,225 is taxed at 10%. His next $28,225 is taxed at 15%.

He doesn't pay 25% on all $70,000 (or $17,500); instead he only pays $13,293.75. His effective tax rate is 18.99%.

Effective Tax Rate for Corporations

Like individuals, corporations have a tiered tax system with increasing marginal rates. Companies can also write off losses or other expenses to reduce their taxable earnings from year to year. Also as with individuals, the effective tax rate for corporations is a better assessment of tax burden than the marginal rate.